Economic inequality in the USA

Eleven years again Kevin Phillips published Wealth and Democracy, a book in which he argued that increasing concentration of wealth at the top was undermining the structure of American democracy. The evidence in support of his thesis continues to accumulate as shown in this Pew report:

There are two reasons this is a major concern. One is economic and one is political. In a society whose economy depends on consumer spending, concentration of wealth acts as a break on growth. In a society whose political system is firmly founded on representative democracy, concentration of wealth awards greater political power to the rich.

American dependence on credit financing enhances this effect: wealth tends to flow from borrowers to lenders. As wages have remained flat for an extended period, people have come to rely on credit to finance their lifestyles. Personal indebtedness has risen dramatically. Total U.S. consumer debt as of May 2011 was $2.43 trillion.

For those at the top the recession is over, but for those further down it looks to be permanent. One person pointed out that the United States is beginning to resemble a feudal society with an elite at the top, a strong military, and a majority oppressed and subservient. That is perhaps too extreme, but a comparison worth thinking about.

No one can deny that the United States has serious economic problems, some structural and some cyclic resulting from the great recession, but those who claim the country is bankrupt (Lawrence Kotlikoff for example) do so because they have an agenda of greatly reducing social services.

The pension problems in the states and in large companies are serious, but they were created with some deliberation. San Diego is a text book case. It's a very Republican area and the city council and mayor were extremely reluctant to raise taxes. To avoid a tax increase, they quite consciously overestimated return on investment the pension funds would see. Too optimistic projections were the order of the day for many years until the mayor was forced to resign and the council ordered by a court to budget extraordinary amounts to pay the pensions of teachers, firemen, and police. The result is that the city is unable to hire many new employees only on a temporary basis.

How did any sensible person support this malfeasance. As I said, there was a reluctance to raise taxes and cities and states wanted to keep current costs low. Employees were convinced to accept lower pay in return for too generous benefits at a later date.

Every state and city with this problem wants to renegotiate pension obligations to provide lower payouts in future years, but those employees who already sacrificed paychecks for pensions over the years in hopes of a comfortable retirement are not happy with that solution. However, it's what is going to happen. Conservatives like to present the situation as simply overly generous pension promises, forgetting that those promises were given in exchange for lower salaries.

Government salaries have traditionally been low, but with great job security and good benefits. Those who accepted that bargain now find themselves screwed by reductions in pension benefits at a time when they have no options for other income. They will be further injured by any proposed reductions or restructuring in Medicare and Social Security.